VALUE OF MONEY EQUIVALENCE 15

21.5 per cent. An exact calculation gives a value of 21.4 per cent. Thus,
this method of mineral evaluation requires obtaining a higher actual rate
of capital return than is indicated by the stipulated rate, since the
Hoskold equation involves compounding part of the interest at a lower
rate.
For completeness the remaining two approximate equations in Table
2-1 are illustrated by using the same data employed in the illustration
for Eqs. (2-2) and (2-5). Thus, Eq. (2-2a) can be used to estimate the
uniform annual payment required to repay $1,000 in 10 years at 6 per
cent:

The $133 approximates the $135.90 obtained by Eq. (2-2) to within

2.1 per cent. The first term on the right side ($100) is straight-line
depreciation (see Chap. 3) and the second term ($33) is called average
interest. It is obvious that using straight-line depreciation plus 6 per
cent annual interest of $60 would give a grossly incorrect answer ($160)
for the annual payment to repay the $1,000; this error is often made.
The error would be due to the fact that by such a calculation the borrower
is charged interest on the full amount each year, when actually he is
reducing the principal continuously. The use of "average interest" on
full principal is an approximate mathematical tool to give the same result
as full interest on the gradually reducing principal. Such equations give
low results for R, and the magnitude of the error increases with both
time and interest rate. The user should appreciate these limitations in
drawing conclusions in an economic study.
Similarly, Eq. (2-5ei) for a pump costing $1,000 and having a salvage
value of $100 at 10 years with interest at 6 per cent gives

R = ?W + 900
^X + 100 X 0.06 = $125.70

The $125.70 approximates the $128.30 from Eq. (2-5) to within 2 per
cent.
2-3. Equivalence. A study of the results for Eqs. (2-1), (2-2), and
(2-4) in the above illustrations show that, regardless of the manner in
which a loan of $1,000 is repaid, all methods are equivalent if the $1,000
earns $791 interest in 10 years when the interest rate is 6 per cent. The
borrower pays all or less than the $791 interest in proportion to the time
he uses the money. If the lender receives payments before the 10-year
period is up, it is his responsibility to reinvest it if he wants to make up
the potential interest lost when the first borrower repays him.
There are repayment methods other than the lump-sum and uniform